Dollar Tree 2006 Annual Report Download

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2006 ANNUAL REPORT
EXPANDING
THRILLING
EXCITING
STRIVING
PERFORMING
LEADING
EVOLVING
IMPROVING
SURPRISING
DELIVERING
COMPELLING
COMMITTED
INNOVATIVE
RESPONSIVE
CONVENIENT
EFFICIENT
FUN
FRESH
UNIQUE
VALUE
DOLLAR TREE

Table of contents

  • Page 1
    2006 ANNUAL REPORT E X PA N D I N G THRILLING EXCITING STRIVING PERFORMING LEADING E V O LV I N G IMPROVING SURPRISING DELIVERING COMPELLING COMMITTED I N N O V AT I V E RESPONSIVE CONVENIENT EFFICIENT FUN FRESH UNIQUE VA L U E DOLLAR TREE

  • Page 2
    ... goods. From fresh flowers and candy at Valentine's Day to our "Build a Wreath" promotion, themed ornaments, holiday gift wrap and gift bags at Christmas, Dollar Tree is truly the store for all seasons. Headquartered in Chesapeake, Virginia, with a nationwide logistics network, and more than 40...

  • Page 3
    ... 1.0% 1.1 Net Sales Gross Profit Operating Income Net Income Diluted Net Income Per Share Working Capital Total Assets Total Debt Shareholders' Equity Number of Stores Open Total Selling Square Footage Comparable Store Net Sales Increase/(Decrease)(c) Average Net Sales Per Store (c) $3,969.4 1,357...

  • Page 4
    ... national brands, popular regional brands, exclusive Dollar Tree brands, and an ever-changing mix of exciting seasonal merchandise and high value closeouts. It is our prime goal to create merchandise excitement for our customers, every time they visit our store. This year our merchants, working with...

  • Page 5
    NET SALES ($ In Billions) New promotions, such as our "Build a Gift Basket" and "Build a Wreath" encouraged multiple purchases and exceeded our customers' expectations with high value for their $1 and a fun shopping experience. We benefited from increased sales of basic products; items that people ...

  • Page 6
    ... year we will begin to expand this concept with plans to open 25 new Deal$ stores. These new Deal$ stores will provide an additional opportunity to develop the sales potential and operating metrics of the new model. C O R P O R ATE G OV E R N AN C E Dollar Tree is committed to responsible corporate...

  • Page 7
    ...-funded our $175 million capital expenditures in 2006. We are planning $170-$190 million for 2007 capital expenditures including expansions of our Briar Creek Distribution Center and home office in Chesapeake, Virginia. All of this will be funded from internally generated cash with significant free...

  • Page 8
    ... label and national brands along with the unexpected "Thrill of the Hunt" that has become a hallmark of our stores. We offer a broad variety of more than 40 private label products that are marketed exclusively at Dollar Tree, including our sugar-free Icy Breeze® gum and mints and our Royal Norfolk...

  • Page 9
    ...'s best to shop NOW, and nowhere is that more evident than in our "WOW Zone." Customers continue to enjoy "The Thrill of the Hunt" in this landmark section. Promotions like our weekly "Featured Item" make this a frequently shopped area. CONVENIENT DOLLAR TREE STORES, INC. • 2006 ANNUAL REPORT 7

  • Page 10
    ... located where middle America lives and works. At Dollar Tree, shopping is fast and fun! Our average store size is ideal from the customer's perspective. Shoppers can find an ever-changing assortment of extreme value merchandise each time they visit. D 8 DOLLAR TREE STORES, INC. • 2006 ANNUAL...

  • Page 11
    ...valuable and convenience is a must. With more than 3,200 stores in 48 states, Dollar Tree provides a unique combination of convenience, extreme value and a fun, fresh, exciting shopping experience to customers throughout the contiguous United States. DOLLAR TREE STORES, INC. • 2006 ANNUAL REPORT 9

  • Page 12
    ... and check out quickly as Debit Cards and EBT are accepted chain-wide, and food stamps are accepted in over 600 locations. Gift cards are now available, so share the convenient Dollar Tree shopping experience with someone you know! E V O LV I N G 10 DOLLAR TREE STORES, INC. • 2006 ANNUAL REPORT

  • Page 13
    ...consumable products including toys, health and beauty aids, household supplies, candy, snacks, stationery, greeting cards, crafts, gift bags, electronic accessories, home decor, party supplies, books, DVDs, dinnerware, seasonal favorites and much, much more. At Dollar Tree stores, customers can find...

  • Page 14
    DOLLAR TREE LOGISTICS NETWORK Distribution Center Square Footage Ridgefield, Washington (665,000 sq. ft.) Stockton, California (525,000 sq. ft.) Salt Lake City, Utah (252,000 sq. ft.) Briar Creek, Pennsylvania (603,000 sq. ft.) Joliet, Illinois (1,200,000 sq. ft.) Chesapeake, Virginia (400,000 sq. ...

  • Page 15
    ... of a slight shift in merchandise mix to consumables and the increase of freezers and coolers on gross profit margin and sales; • the effect that expanding tender types accepted by our stores will have on sales; • the net sales per square foot, net sales and operating income attributable to...

  • Page 16
    ... explain the general financial condition and the results of operations for our company, including: • what factors affect our business; • what our earnings, gross margins and costs were in 2006 and 2005; • why those earnings, gross margins and costs were different from the year before; • how...

  • Page 17
    ... to come from the square footage growth resulting from new store openings and expansion of existing stores. Fiscal 2006 ended on February 3, 2007 and included 53 weeks, commensurate with the retail calendar. The 53rd week in 2006 added approximately DOLLAR TREE STORES, INC. • 2006 ANNUAL REPORT 15

  • Page 18
    ... in the number of transactions and 2.7% in transaction size, compared to fiscal 2005. We believe comparable store net sales were positively affected by the initiatives we began putting in place in 2005, including expansion of forms of payment accepted by our stores and the roll-out of freezers and...

  • Page 19
    ...square foot increase in 2006, approximately 1.2 million resulted from the acquisition of the Deal$ stores and 0.4 million was added by expanding existing stores. Gross Profit. Gross profit margin decreased to 34.2% in 2006 compared to 34.5% in 2005. The decrease was primarily due to a 35 basis point...

  • Page 20
    ...basis points primarily due to the deleveraging associated with negative comparable store net sales for 2005. Of the 2.6 million selling square foot increase in 2005, approximately 0.5 million in selling square feet was added by expanding existing stores. 18 DOLLAR TREE STORES, INC. • 2006 ANNUAL...

  • Page 21
    ... increase inventory turns through a reduction in 2005 purchases. The aforementioned net cash provided by operating activities was partially offset by a decrease in deferred tax liabilities chiefly as a result of the elimination of bonus depreciation. DOLLAR TREE STORES, INC. • 2006 ANNUAL REPORT...

  • Page 22
    ...). 20 DOLLAR TREE STORES, INC. • 2006 ANNUAL REPORT The first $50.0 million was executed in an "uncollared" agreement. In this transaction, we initially received 1,656,178 shares based on the market price of our stock of $30.19 as of the trade date (December 8, 2006). A weighted average price was...

  • Page 23
    ...freezers and coolers to approximately 250 stores, an expansion of the Briar Creek Distribution Center and an expansion to our home office and data center in Chesapeake, Va. We believe that we can adequately fund our working capital requirements and planned capital expenditures for the next few years...

  • Page 24
    ... cost or market when markdowns are taken as a reduction of the retail value of inventories on a timely basis. Derivative Financial Instruments We are party to one interest rate swap, which allows us to manage the risk associated with interest rate 22 DOLLAR TREE STORES, INC. • 2006 ANNUAL REPORT

  • Page 25
    ... experienced significant differences in our estimates of our tax accrual. In 2006 and 2005, we recognized approximately $0.7 million and $1.5 million, respectively, of tax benefits related to the resolution of tax uncertainties in certain states. DOLLAR TREE STORES, INC. • 2006 ANNUAL REPORT 23

  • Page 26
    ... certain holidays, especially Easter; • the timing of new store openings; • the net sales contributed by new stores; • changes in our merchandise mix; and • competition. Our highest sales periods are the Christmas and Easter seasons. Easter was observed on March 27, 2005, April 16, 2006 and...

  • Page 27
    ..., management is not able to predict the changes in fair value of our interest rate swap. The fair values are the estimated amounts we would pay or receive to terminate the agreement as of the reporting date. These fair values are obtained from an outside financial institution. DOLLAR TREE STORES...

  • Page 28
    ... of the Treadway Commission (COSO), and our report dated April 2, 2007, expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting. Norfolk, Virginia April 2, 2007 26 DOLLAR TREE STORES, INC. • 2006 ANNUAL REPORT

  • Page 29
    ...income Interest expense (Notes 5 and 6) Income before income taxes Provision for income taxes (Note 3) Net income Basic net income per share (Note 7) Diluted net income per share (Note 7) See accompanying Notes to Consolidated Financial Statements. DOLLAR TREE STORES, INC. • 2006 ANNUAL REPORT 27

  • Page 30
    ... BALANCE SHEETS (in millions, except share data) February 3, 2007 January 28, 2006 ASSETS Current assets: Cash and cash equivalents Short-term investments Merchandise inventories Deferred tax assets (Note 3) Prepaid expenses and other current assets Total current assets Property, plant...

  • Page 31
    ... Issuance of stock under Employee Stock Purchase Plan (Note 9) Exercise of stock options, including income tax benefit of $2.1 (Note 9) Repurchase and retirement of shares (Note 7) Restricted stock amortization (Note 9) Balance at January 29, 2005 Net income for the year ended January 28, 2006 Other...

  • Page 32
    ...The Company purchased equipment under capital lease obligations amounting to $0.1 million, $0.4 million and $0.4 million in the years ended February 3, 2007, January 28, 2006, and January 29, 2005, respectively. See accompanying Notes to Consolidated Financial Statements. 30 DOLLAR TREE STORES, INC...

  • Page 33
    ... of Dollar Tree, Deal$, Dollar Bills and Dollar Express. Our stores average approximately 8,200 selling square feet. The Company's headquarters and one of its distribution centers are located in Chesapeake, Virginia. The Company also operates distribution centers in Mississippi, Illinois, California...

  • Page 34
    ...) Costs directly associated with warehousing and distribution are capitalized as merchandise inventories. Total warehousing and distribution costs capitalized into inventory amounted to $25.6 million and $25.3 million at February 3, 2007 and January 28, 2006, respectively. Property, Plant and...

  • Page 35
    ... at the time a sale is made to its customer. Taxes Collected The Company reports taxes assessed by a governmental authority that are directly imposed on revenueproducing transactions (i.e., sales tax) on a net (excluded from revenues) basis. DOLLAR TREE STORES, INC. • 2006 ANNUAL REPORT 33

  • Page 36
    ... using the closing price of the Company's common stock on the date of grant. On March 30, 2007, the Board of Directors granted approximately 0.3 million restricted stock units and options to purchase 0.4 million shares of the Company's common stock under the Company's Equity Incentive Plan and the...

  • Page 37
    ..., which expire Other Assets, Net Other assets, net includes $39.2 million of restricted investments. The Company purchased these restricted investments to collateralize long-term insurance obligations. These investments replaced higher cost stand DOLLAR TREE STORES, INC. • 2006 ANNUAL REPORT 35

  • Page 38
    ....9 Year Ended January 28, 2006 $108.1 14.7 122.8 (20.6) (0.9) (21.5) $101.3 Year Ended January 29, 2005 $75.8 16.5 92.3 15.9 (0.3) 15.6 $107.9 Year Ended January 28, 2006 $101.3 0.2 (1.2) $100.3 Year Ended January 29, 2005 $107.9 0.4 (2.1) $106.2 36 DOLLAR TREE STORES, INC. • 2006 ANNUAL REPORT

  • Page 39
    ....7) DOLLAR TREE STORES, INC. • 2006 ANNUAL REPORT 37 Year Ended January 28, 2006 35.0% Year Ended January 29, 2005 35.0% 35.0% 3.3 (1.7) 36.6% 3.4 (1.6) 36.8% 3.6 (1.1) 37.5% $ 33.5 $ 30.6 1.3 9.3 (1.3) 42.8 - 1.0 - 31.6 A valuation allowance of $1.3 million, net of federal tax benefits...

  • Page 40
    ... Ended January 28, 2006 $225.8 0.7 Year Ended January 29, 2005 $200.7 0.9 Non-Operating Facilities The Company is responsible for payments under leases for certain closed stores. The Company was also responsible for payments under leases for two former distribution centers whose leases expired in...

  • Page 41
    ... statements as of February 3, 2007. In 2006, the Company was served with a lawsuit filed in federal court in the state of Alabama by a former store manager. She claims that she should have been classified as a non-exempt employee under the Fair Labor Standards Act and, therefore, should have...

  • Page 42
    ... credit spread. The interest rate on the swap is subject to adjustment monthly. No payments are made by either party for months in which the Demand Revenue Bonds On May 20, 1998, the Company entered into an unsecured Loan Agreement with the Mississippi 40 DOLLAR TREE STORES, INC. • 2006 ANNUAL...

  • Page 43
    ... 29, 2005, respectively, 1.5 million, 3.4 million and 1.5 million stock options are not included in the calculation of the weighted average number of shares and dilutive potential shares outstanding because their effect would be anti-dilutive. DOLLAR TREE STORES, INC. • 2006 ANNUAL REPORT 41

  • Page 44
    ...representing the minimum number of shares under the agreement. The maximum number of shares that can be received under the agreement is 1,693,101. The number of shares is determined based on the weighted average market price of the Company's common 42 DOLLAR TREE STORES, INC. • 2006 ANNUAL REPORT

  • Page 45
    ... 2006 and January 29, 2005. NOTE 8 - EMPLOYEE BENEFIT PLANS Profit Sharing and 401(k) Retirement Plan The Company maintains a defined contribution profit sharing and 401(k) plan which is available to all employees over 21 years of age who have completed one year of service in which they have worked...

  • Page 46
    ... at the 30-year Treasury Bond Rate. If a director elects to be paid in common stock, the number of shares will be determined by dividing the deferred fee amount by the current market price of a share of the Company's common stock. The number 44 DOLLAR TREE STORES, INC. • 2006 ANNUAL REPORT

  • Page 47
    ... of option awards in 2005 and 2004 was also calculated using the Black-Scholes option-pricing model. The weighted average assumptions used in the Black-Scholes option pricing model for grants in 2006, 2005 and 2004 are as follows: Expected term in years Expected volatility Annual dividend yield...

  • Page 48
    ... the Company's closing stock price January 28, 2006 (the last day of fiscal 2005), when the performance targets Shares Nonvested at January 28, 2006 Granted Vested Forfeited Nonvested at February 3, 2007 295,507 292,697 (106,547) (24,880) 456,777 46 DOLLAR TREE STORES, INC. • 2006 ANNUAL REPORT

  • Page 49
    ... single-price point model in its Dollar Tree stores. The Company paid approximately $32.0 million for store-related and other assets and $22.1 million for inventory. This amount includes approximately $0.6 million of direct costs associated with the acquisition. The results of Deal$ store operations...

  • Page 50
    ... Company will receive additional shares from the third party depending on the volume weighted average First Quarter(1) Fiscal 2006: Net sales Gross profit Operating income Net income Diluted net income per share Stores open at end of quarter Comparable store net sales change Fiscal 2005: Net sales...

  • Page 51
    ... and annual reports, Forms 10-K, or more information should be directed to: Shareholder Services Dollar Tree Stores, Inc. 500 Volvo Parkway Chesapeake, VA 23320 (757) 321-5000 Or from our company web site: www.DollarTree.com LEGAL COUNSEL Williams Mullen 999 Waterside Drive Suite 1700 Norfolk, VA...

  • Page 52
    T H E R E ' S P L E N T Y O F RU N WAY A H E A D. 500 Volvo Parkway Chesapeake, Virginia 23320 Phone (757) 321-5000 www.DollarTree.com